In Bizarro Market, stocks rise along with pessimism

Opinion: The evidence of a bubble is there, yet investors keep pushing up equities

By

NatWorden

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Former Federal Reserve Chairman Alan Greenspan, who coined the term ‘irrational exuberance’

The Dow Jones Industrial Average closed at 6,437 on that December day in 1996 when Fed Chairman Alan Greenspan coined “irrational exuberance” in describing investor sentiment during the period of dot-com mania.

It was the 1990s. Jobs were plentiful with the unemployment rate at 5.4%. Air travel was dirt cheap and easy, and every Sept. 11 was just another day in a country brimming with peace, prosperity and confidence in the future.

Nowadays, economic hardship is everywhere, and the future seems bleak. The nation is bogged down with intractable foreign military misadventures and under constant threat from a new enemy — “the terrorists.” Class divisions are bitter as social safety nets have grown, taxes have increased on high earners and the federal bailout of the titans of Wall Street remains a bitter pill to swallow for working families now trying to make ends meet.

Instead of feeling irrationally exuberant, most people seem to be rationally pessimistic about their investments, and yet the Dow is somehow gyrating around 17,000, a record. The tech-heavy Nasdaq is up 23% over the past 12 months, with trendy stocks like Facebook
FB, -1.18%
and Apple
AAPL, -1.54%
hovering near all-time highs.

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Welcome to the Bizarro Market. This stock market reminds me of the great “Seinfeld” episode called “The Bizarro Jerry” when Jerry describes to Elaine the concept of the “Bizarro World,” an old Superman comic-book reference. The Bizarro World is the mirror opposite of the real world. “Up is down; down is up,” says Jerry. “[Superman] says ‘hello’ when he leaves, ‘goodbye’ when he arrives.”

In Bizarro Market, the post-financial-crisis economic recovery is so fragile after half a decade that the Fed is keeping its short-term interest rate target at a record low of near-zero to keep things afloat, even while the stock market roars like it’s 1999.

And in Bizarro Market, the bubble has few cheerleaders. Whatever bullish commentators exist are being drowned out by a constant barrage of media commentating and reportage making the case that stocks are way overvalued.

The notion that the stock market is largely disconnected from the real economy is almost ubiquitous — self-evident even to people who know next to nothing about investing. And it’s hardly contrarian to be out making the case that stocks are in a bubble. A real contrarian in today’s environment would be arguing that the stock market is undervalued and has plenty of room to run. Even stock brokers and financial advisers desperate to lure new clients into stocks can only bring themselves to say that equities are probably fairly valued at best.

And, still, the bull market charges on without even a token 10% correction.

It’s hard out there in Bizarro Market for professional investment managers. Those who ignored all the hysterics in 2009, 2010 and 2011 and guided clients into the stock market deserve credit for capturing the spectacular gains of recent years. But now what?

Nobel Laureate and Yale Professor Robert Shiller, author of “Irrational Exuberance,” reports that his price-to-earnings ratio metric puts stock valuations at historic highs, comparable with levels that were reached before the stock market crash of 1929 and the financial crisis of 2008.

Stocks appear overvalued, and the Fed is about to rein in its easy-money policies. Such a move would not bode well for stocks if and when it happens, but remember, the Dow kept climbing for over four years after “The Bizarro Jerry” aired on NBC in 1996 and Greenspan famously uttered the words “irrational exuberance.” It peaked in early 2000 at nearly 12,000.

So when will Bizarro Market peak? That is, of course, the trillion-dollar question, and I’m not a market-timer, so I wouldn’t venture a guess. The economy certainly has room to improve, and the average small-time investor could get a lot more optimistic, which may mean this could go on for quite a while.

However, the key to investing success is to buy low and sell high, and right now, prices look high.

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